Smoke signals: pricing wildfire risk
The market is clearly undergoing a period of significant hardening with rate increases expected to continue upwards into 2021 as a result of the immediate and longer-term impacts of COVID-19, coupled with successive years of increased loss severity and frequency, and prior-year loss performance across multiple lines.
That is according to Talbir Bains, chief executive officer of Volante Global, speaking to Intelligent Insurer. But he also warned that, while there is much focus on rate developments and price hikes, the critical factor is not so much the percentage increase, but whether that increase is adequate for the risk underwritten.
“If an underwriter secures a price 15 percent higher than the expiring rate, but that price per unit of exposure is still only 50 percent of what it should be, then the negative impact of that poorly-priced capacity will be felt further down the line,” Bains said.
He explained that the combination of the wider macroeconomic factors resulting from COVID-19, plus the industry-level challenges already facing the sector, mean there is much less scope for underwriting error in this hardening market.
“Rates are rising, but it is rate adequacy that is key.
“It is relatively easy to take advantage of improved pricing, but if risk selection is not being conducted in a sustainable way that ensures remediation is not required at some point in the future to address poor underwriting decisions, then the market will pay a heavy price,” Bains said.
“I do believe the market is recognising this. There is a greater emphasis on cautious risk selection and capacity allocation at an adequate pricing level. The mantra for the current market cycle must be ‘measure twice and cut once’.
“If we can maintain that approach then I firmly believe we will be able to sustain these harder conditions for a longer period than in previous cycles.”
“The mantra for the current market cycle must be ‘measure twice and cut once’.” Talbir Bains
New model MGA
For the managing general agent (MGA) sector specifically, Bains noted that during hard market conditions, the perceived appeal of the MGA is reduced, particularly as carriers begin to question the continued economic viability of the commission structures employed by many such companies.
“However, in my view this is more a reflection of the inherent flaws in the standard model, rather than the overall value of the role MGAs can play in supporting the underwriting objectives of their carriers.
“This model was already coming under severe scrutiny in recent years, and the current market transition has sharpened that scrutiny further,” he said.
He explained that total acquisition costs in the MGA sector remain too high, while commission structures continue to act as a drag.
Further, given current market developments, many MGAs lack the flexibility and agility to respond quickly to these rapidly evolving market dynamics, while niche players impacted directly by COVID-19 are being hit hard, he stated.
When Volante entered the market in December 2017, it adopted what Bains calls a radically different MGA model.
“Given the market we currently face, I do not believe we could have achieved the financial stability and underwriting certainty we currently have had we not done so.
“We maintain a seven-strong panel of capacity providers, 40 percent of which represents AA rated capacity. Every carrier has signed up to a multi-year agreement, which means that at this time we have the premium capacity to operate effectively through these hard market conditions,” he explained.
He said the company’s approach from the start was to treat carriers as strategic partners and to maintain direct contact so they have a view of all underwriting decisions.
That line of sight has enabled it to respond to changing markets and make underwriting decisions quickly that are mapped to specific conditions.
“We have also attacked every cost point in the MGA chain. For example, our commission structure is 100 percent contingent on underwriting profit for our carriers over the long term, which I firmly believe is the prevailing culture that the market requires moving forward.
“We have targeted fees and operational expenses, while simultaneously maintaining high standards of corporate governance, underwriting practices and enterprise risk management.
“These factors have ensured that in these challenging waters we have removed any drag from the model and are able to operate much more efficiently,” Bains said.
Opportunities remain in these market conditions, he stresses. He argues that, despite the market challenges, the industry is facing perhaps one of the broadest horizons of opportunity we have seen for a considerable time.
“These opportunities are manifesting themselves in multiple ways, in the form of rate increases across virtually all lines of business, opportunities to expand positions in sectors where capacity has been withdrawn, and in emerging risk areas where innovation can help open-up market potential,” he said.
“However, these market opportunities come with significant risk and there is a clear onus on all practitioners to apply strict due diligence to every underwriting decision.
“For example, where we have seen capacity contract in certain lines, before seeking to fill that gap carriers need to ensure they fully understand the associated tail to ensure that whatever is wagging it won’t knock them over at some point in the future.
“The risks of making the wrong call in the current market are simply too great.
“On the flipside, there is also the danger of being too risk-averse in current conditions. Opportunities are there to achieve sustainable growth at adequate pricing, but a failure to move on this will see those companies that are too cautious fall behind.
“It is very much a careful balancing act that carriers will need to maintain,” he explained.
“From an MGA perspective, those companies which can demonstrate the right model attributes, clear carrier alignment and strong performance and adherence to strict corporate governance standards, will be granted the pen to embrace these opportunities and will emerge stronger as a result,” he concluded.
Volante, Monte Carlo 2020, Insurance, Reinsurance, Talbir Bains, Europe